Why regulation rattles the chains

The idea of franchisors regulating franchisors is probably a little scary to franchisees. Ms. Phelan allows that franchisees or outside business people might also serve, but it is clear who would control such a body: franchisors…But this may be the CFA’s ultimate bind: If the association resists legislation in the belief that it won’t make a difference, then legislators must ask what will work. Perhaps detailed legislation that describes what the accepted relationship between franchisors and franchisees will be? Heaven forbid.But this may be the CFA’s ultimate bind: If the association resists legislation in the belief that it won’t make a difference, then legislators must ask what will work. Perhaps detailed legislation that describes what the accepted relationship between franchisors and franchisees will be? Heaven forbid.

The Globe and Mail
March 3, 1997

Why regulation rattles the chains
John Southerst

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ONTARIO for the first time is writing rules to govern franchisors and how they deal with people who invest in fast-food outlets, convenience stores and other offerings.

It’s an important move because the province is home to the vast majority of Canada’s franchisors. But the Canadian Franchise Association, which represents them, is determined to preserve its members’ relatively unfettered right to carry on business as usual.

“We don’t support legislation in Ontario,” says the CFA’s new chair, Patricia Phelan, director of franchising for Kelsey’s International Inc. in Oakville, Ont.

Ms. Phelan cites some reasons for the CFA’s opposition: the unknown content of the legislation, the desire of the industry to regulate itself through a commission of peers, and – tellingly – because franchisors say legislation will still not prevent the most serious conflicts with franchisees.

But simply opposing the rules seems futile. Draft legislation could be available this month and its passage is expected by the summer.

And consider why Queen’s Park is acting. Despite its image as a friend of big business, the Mike Harris government is listening to rising numbers of disgruntled ex-franchisees, who claim to have been lured into one-sided agreements by rosy promises and precious little hard information.

Even when it comes to financial disclosure, franchisors currently have no obligation to show an investor a driver’s licence, much less a financial statement that shows a franchisee the stability of an investment, sources of income, and how royalties and advertising contributions are spent.

But in the United States, federal rules governing disclosure apply to all franchisors. And a majority of states have franchise legislation.

Here are some of the issues that have been raised in Ontario:

UNCERTAIN DETAILS. Franchise legislation generally covers three areas: disclosure of business and financial information, registration and approval of the franchisor and its disclosure documents, and regulation of the relationship with franchisees.

Ontario has expressed interest in moderate disclosure and simple registration of franchisors (not disclosure documents) without a substantial approval process. In the hopes of avoiding any bureaucratic involvement in franchise relationships, the province is privately discussing a dispute resolution panel of franchisors and franchisees.

The CFA now requires its members to disclose business information, but not significant financial information. It argues that many of its members are private companies and should not have to open their books to potential competitors.

Nevertheless, franchisees are private individuals who often invest significant savings. To give them less than full information is like selling securities without a prospectus. Franchisors talk a lot about partnerships with their franchisees, so they should treat them like partners. Disclosure should go without saying.

And since registration without approval isn’t an issue, uncertainty over the legislation’s content really comes down to dispute resolution.

REGULATION OF DISPUTES. Franchisors such as Ms. Phelan wonder what a review panel’s power might be. Would it be moral suasion, where an ombudsman-like body makes recommendations and hopes that good will prevails? Would decisions have legal force? Or, as the CFA proposed recently, would franchisees pay a fee for a hearing, after which they would be directed by the panel to the next stage: professional mediation, arbitration or “see you in court?”

And who would sit on the panel? Ms. Phelan suggests franchisors are really professionals who serve the needs of franchisees and consumers, similar to doctors or lawyers. “An independent review board,” Ms. Phelan says, “could be made up of peers.”

The idea of franchisors regulating franchisors is probably a little scary to franchisees. Ms. Phelan allows that franchisees or outside business people might also serve, but it is clear who would control such a body: franchisors.

And who will represent franchisees – radical embattled ones or successful owners nominated by their franchisors? Who should have more say – a few hundred franchisors or thousands of franchisees? These are the kinds of questions that frighten franchisors and keep them from supporting legislation.

EFFECTIVENESS. If most franchising blowups would be unaffected by legislation, why bother? Disputes involving Pizza Pizza and Loeb food stores, for instance, involved protracted litigation. “Everyone uses these cases as examples of why we need legislation,” Ms. Phelan says. “But it needs to be understood that legislation would not have prevented them.”

The reason is that the disputes centred on interpretations of the terms of the franchise agreements. If learned counsel and judges took months and years to untangle their meaning, surely review panels could do no better.

But this may be the CFA’s ultimate bind: If the association resists legislation in the belief that it won’t make a difference, then legislators must ask what will work. Perhaps detailed legislation that describes what the accepted relationship between franchisors and franchisees will be?

Heaven forbid.

John Southerst is a Toronto business writer who can be reached by E-mail at moc.eriw-eht|htuosj#moc.eriw-eht|htuosj


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